By Richard Martin, Contributing Editor

Oil and gas drilling in the U.S. has begun the crawl slowly out of the hole it fell into over the last year. With the Dow Jones index struggling above 9000, the housing market showing signs of recovery, and oil prices creeping upward, the rig count by energy industry Baker Hughes Inc. hit 943 last week, an increase of 23 working units, still less than half of the total in operation a year ago.

The biggest increase was in Louisiana, which added 11 rigs; Colorado, North Dakota, and Wyoming gained two rigs apiece, while New Mexico added one. There are now 44 drilling sites operating in Colorado, most of them natural gas.

“The number of drilling rigs working in Colorado has plunged 68 percent from the August 2008 peak of 138 rigs,” the Denver Business Journal reported in May, “and no turnaround is expected until the economy recovers and commodity prices rise.”

Those prices have finally started to inchward. Last week benchmark crude for August delivery climbed above $68 a barrel on the New York Mercantile Exchange (NYMEX), after a nearly year-long plunge from its peak of nearly $150 a barrel in July 2008.

Along with the broader market rally, the recovery in the oil patch has aided energy producers in the state. Among Denver’s large publicly traded oil and gas companies, Berry Petroleum Company has seen its share price increase four-fold since early March, while Delta Petroleum Corp. has doubled, Credo Petroleum Corp. is up 70%, and Forest Oil Corp. has jumped two-and-a-half times in value. That doesn’t sound much like “an industry in crisis,” as Sarah Emerson, managing director at Energy Security Analysis Inc., called it earlier this month.

Overall, energy stocks have edged upward in recent weeks. Last week the NYSE Arca Oil Index reached 976, the NYSE Arca Natural Gas Index hit 452, while the Philadelphia Oil Service Index was flat at 175. Shares in pipeline builder El Paso Corp. rose earlier this week to $10.20 after the company announced that Global Infrastructure Partners would invest up to $700 million in the Ruby Pipeline project. A 675-mile, 42-inch interstate natural gas conduit, the Ruby Pipeline project will connect natural gas basins in the Rocky Mountains to the energy-thirsty states of the West Coast.

Clearly, though, investors remain wary of Big Oil firms, which recorded record profits in 2008 but have been slammed in the downturn. Can the rally be sustained? That depends, of course, on a host of factors including the fragile economic recovery.

“If the current more positive outlook for the global economy turns sour—and there are many respected commentators still talking about the W-shaped recession—the much anticipated oil demand will be pushed further out into the future,” wrote analysts at  KBC Market Services in the United Kingdom, “and the sheer weight of stocks could lead to a major correction in product prices that will drag crude down too.”

“Optimism prevailed among traders in the energy sector this week,” reported Brad Zigler on the Seeking Alpha blog,  as crude oil rose 8.7%, gasoline increased by 9.5%, and heating oil spiked 11.5%. This summer has seen some unusual phenomena in oil futures trading: “Oil prices were turned upside down this week when the premium normally enjoyed by the U.S. crude benchmark gave way to a discount to its European counterpart,” noted Zigler. Normally trading about a dollar-and-a-half above Brent grade oil from the North Sea, West Texas Intermediate, which serves as the benchmark grade for NYMEX contracts, was selling at an average 31-cent discount to the more sour Brent crude.

Fortunes in the U.S. production industry could be further buoyed by reports of big finds in a newly explored part of the Bakken formation, in the Northern Rockies. But that’s a subject for next week’s blog.